Managing Director, London
Rising prices in the UK retail market drove strong sales growth in March, to round off a strong first quarter to 2017. The Office of National Statistics (ONS) reported that the UK retail market experienced value and volume growth of 4.7% and 2.6% respectively compared with March 2016. Driven by the deep devaluation of sterling and higher import costs, prices in the UK retail market have been steadily increasing over the last few months and in March, the difference between value and volume growth grew to its widest level since May 2012.
Many retailers now feel unable to mitigate the impact of rising import costs solely through squeezing their supply chains. They have resorted to passing on those cost increases to consumers. Although March’s data indicates this is occurring across all subsectors, the effect appears particularly prominent in the food space, where approximately 50% of all produce is sourced abroad.
The high levels of value growth in the first quarter of 2017 may appear to paint a healthy picture of the sector. But it’s worth bearing in mind that these figures offer no insight as to how well firms are managing the deep devaluation of sterling—and subsequent pressure on profitability margins.
Furthermore, although the ONS data shows strong year-on-year growth, the data also indicates a steep decline in month-on-month sales volumes. We believe this may mark the end of the post-Brexit splurge in spending, as the impact of diminishing real incomes, burgeoning household debt, and low employment growth bears down on consumers.
The ONS reported that the unemployment rate remained at 4.7% in the three months leading to February. This is the lowest level since the 1970s. Many economists remain puzzled by the persistence of weak wage growth when low levels of unemployment should result in upwards pressure on wages.
Whatever the cause, the ongoing trend of low pay growth—combined with rising inflation—has begun to curtail consumers’ real incomes, with the effect predicted to intensify throughout the year as prices continue to rise according to Bank of England forecasts.
The latest statistics from the Bank of England indicate that unsecured borrowing rose to £197.4 billion in March, which reflects growth of 8.0% when compared with the same month last year.
Although higher consumer borrowing may boost retail expenditure in the short-term, the data also fuels concerns that the amount of consumer debt may be approaching unsustainable levels; the borrowing growth rate has significantly outstripped earnings over recent months.
Of particular concern to the Bank of England is long interest-free periods on products such as credit cards. Its watchdog, the Prudential Regulation Authority, recently launched a review of lending standards across various forms of finance.
Footfall continued its downward trend in March, as shoppers visiting the high streets and other retail centres fell by 1.7% when compared with the same month last year.
Although the North of England has traditionally seen the most severe decline, the burden has shifted to the West and East Midlands over the last 10 months, which have seen footfall decline by an average across the period of 4.1% and 4.4%, respectively.
Nationwide reported that the average UK house price rose by £1,462 to £207,308 in March, which reflects an increase of 3.5% when compared with the same month last year.
House-price growth softened in March, and the rate of growth has gradually fallen from 5.6% since the aftermath of the EU referendum result. Retailers will be hoping that the widely speculated decline in property prices fails to materialise, and that growth soon stabilises to support consumer confidence going forward.